Back On Capitol Hill, Fed's Bernanke Faces Key Senate Panel

WASHINGTON -(Dow Jones)- U.S. Federal Reserve Chairman Ben Bernanke, in a second day of Capitol Hill testimony, reiterated Wednesday that financial markets remain stressed and that a key interest rate is likely to stay at a record low near zero for some time.

Lawmakers, however, appear less interested in monetary policy and more interested in debating plans to expand the Fed's powers as a financial system regulator. They also are concerned about the weak labor market and tight credit markets.

Senators argued that while the Fed has taken extraordinary measures to stem the crisis, real families and small businesses are still suffering amid rising unemployment and a persistent housing market challenges.

"Mr. Chairman, I appreciate the work you've done...on the monetary policy side of the equation and the positive indicators that we've seen in recent weeks. But these positive indicators seem to be stuck at the top in the process," said Senate Banking Committee Chairman Christopher Dodd, D-Conn., in his opening remarks.

Dodd went on to call on the central bank to take more forceful action.

"I'm very supportive of the effort you've been trying to make as the chairman of the Federal Reserve, but I have serious issues about the institutional issues of all of this as we go forward," said Dodd.

Noting that the Fed regulates major banks, Dodd said "many are asking why that authority is not being exercised to convince these institutions that they need to be moving more aggressively when it comes to bank lending."

Similarly, the panel's top Republican, Richard Shelby of Alabama, said the Fed failed as a banking regulator in the run-up to the financial crisis.

"If the Fed had conducted its regulatory oversight with great diligence, I do not think the financial crisis would have achieved depth and scope that it did," said Shelby.

"In light of the Fed's record of failure as a bank regulator, it should come as no surprise that Congress would take a closer look at the Fed and reconsider its mandate."

Bernanke, who noted that unemployment is one of the Fed's most difficult challenges, faces tough questions from the Senate Banking Committee just as the chairman's term is running out and questions about his future are running rampant. Bernanke's term as chairman expires in only six months, and it's unclear if U.S. President Barack Obama will reappoint him.

Meanwhile, the banking panel is likely to play a key role in helping to decide if Bernanke is renominated.

During Tuesday's hearing before the House Financial Services Committee, there were no direct questions about Bernanke's future.

Instead, lawmakers laid out concerns about the commercial real estate market and inflation.

Lawmakers, who will have to decide how to overhaul finance rules in a way that could prevent future crises, also questioned whether the Fed should keep its consumer protection role.

They also debated a bill introduced by Fed critic U.S. Rep. Ron Paul, R-Texas, to have Congress' investigative arm audit the central bank. More than half of the House has signed on as co-sponsors of that bill.

Bernanke, however, argued that Government Accountability Office audits would be viewed as "a serious weakening of monetary policy."

Still, the legislation's growing popularity proves just how delicate a time this is for the central bank. Bernanke has argued that the government's actions have helped prevent a deeper recession. But the Fed has still come under attack for many of its financial market rescue efforts, including its role in Bank of America's Corp. (BAC) acquisition of Merrill Lynch. Some lawmakers, fed up over government bailouts for giant firms such as American International Group Inc. ( AIG), argue that the central bank is shrouded in secrecy and that the bank's crisis measures should be more transparent.

Still, others have warned lawmakers against going too far: more than 175 prominent economists recently warned that Fed critics are jeopardizing the Fed's independence and its ability to manage the economy.

Source: cnn.com